Wartime Valuations

Wartime Valuations

March 11, 2022

Stock and bond valuations are tricky. They get pushed around by all kinds of variables. The metrics that are normally relied upon, unfortunately, are only useful when markets are boring. These include P/E (price to earnings) multiples, P/B (price to book) value, discounted cash flow projections and so on.


For the majority of investors, valuations boil down to a guess of what the future value of a particular investment will be over time. This is the essence of “buy low, sell high” or the comparison of a revenue stream from one particular source of investment versus another. Geopolitical events can make those guesses venture far and wide from the fundamentals.

Enter the Russian invasion of Ukraine. Investors have been “guessing” that those future values are going to be a lot lower than what they were thinking prior to Putin’s aggression. And that may be true for certain sectors and regions. Euro area bank stocks anyone?


We understand the costs of war are extreme. The loss of life and the destruction of cities and infrastructure cannot be ignored. But the ability to predict how far things will go in this conflict, or any other, is very limited. We do know that a review of history shows us that even in the most severe conflicts, things eventually stabilize and peace returns with its hope and its dividends.

Beyond geopolitical variables, we are also dealing with an uncertain future with regards to inflation and interest rates. And these can have dramatic effects on those guesses about the future value of investments. This is the main reason we diversify. Because the future is uncertain.


We do know commodities have spiked as a result of the war in Ukraine. This puts even more pressure on the inflation metrics. But it also puts central banks in the position of needing to do more to avoid the recessionary effects of conflict. There are no easy answers. We are watching with great care the Chicago Fed National Financial Conditions Index, otherwise known as the financial distress index. Here is a look going back to 1971.





You can see it has very recently turned up. The Fed has tended to be very accommodative when the index is above zero, which makes sense because that is when financial conditions are stressed. Historically, the reading is still relatively low and we do expect the Fed will be tightening in the coming weeks. But how far they’ll be able to go with everything else going on is anybody’s guess.


Further, the higher cost of energy, wheat and other commodities will be a headwind for economies across the globe. If the war in Ukraine has a blessedly short duration, the relief will be welcome.



Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.